Bank regulation is coming from the EU, not the UK coalition
June 3rd, 2010Today we learn that the Coalition Government, overriding LibDem misgivings about retaining some FSA powers, is going to push through Tory plans announced before the election to vest all bank regulatory powers in the Bank of England. This rather misses the point that what matters is not where the powers are located, but how adequate the powers are and how effectively they’re wielded. The UK Government’s plans clearly fail this test and fall well short of regulatory action now being taken by both the EU and the US.
First, the EU has just implemented tougher rules for the operation of hedge funds and private equity. New Labour and the Tories have persistently resisted these reforms, in both cases because of their obeisance to City of London lobbying.
Second, the EU is now proposing a credit ratings watchdog with power to investigate, fine or withdraw licences in a financial sector rightly criticised for its manifest failing to detect the toxic nature of financial products containing sub-prime mortgages which unleashed the financial crash. Even this is not enough: the fundamental problem is conflict of interest – the fact that, almost incredibly, the rating agencies are paid by the institutions they are supposed to be assessing. The UK Government however has so far come forward with no reform here at all. But that’s not all.
Third, there are differences between the UK on the one hand and the EU and the US on the other about what levies or taxes on banks are now appropriate, both to recoup the colossal taxpayer sums used for the bail-outs and to prevent a recurrence of the recent meltdown (issues of capital adequacy ratios or ‘living wills’ to secure orderly wind-down). Again the UK is currently taking the feeblest line.
Fourth, there remains the controversial issue of short-selling, particularly ‘naked shorting’ where assets that are not owned are traded often on a huge scale and most damagingly in respect of sovereign debt. Germany has now extended its original ban on shorting of financial stocks to the whole market. The UK is taking no action.
Most importantly of all, the US has adopted the Volcker rule of requiring banks to spin off their proprietary trading arms in order to prevent unacceptable exposure to specualtive failure. New Labour and the Tories however have consistently refused (Vince Cable notwithstanding) to hive off the casino investment arms of banks from their traditional retail business, thus keeping open the very real risk of a further crash in the future.
The UK record on banking reform remains weak, reluctant and ineffective: British Bankers’ Association 5, British economy O.
June 3rd, 2010 at 10:48 am
Bank regulation is coming from the EU, not the UK coalition http://is.gd/cARnw
June 3rd, 2010 at 10:58 am
RT @michaelmeacher: The EU and US are now pushing serious banking reform; the UK remains stuck in the grip of the City of London http://wp.me/pPvte-fr
June 3rd, 2010 at 11:46 am
RT @michaelmeacher: The EU and US are now pushing serious banking reform; the UK remains stuck in the grip of the C… http://wp.me/pPvte-fr
June 3rd, 2010 at 11:48 am
RT @michaelmeacher: The EU and US are now pushing serious banking reform; the UK remains stuck in the grip of the City of London http://wp.me/pPvte-fr
June 3rd, 2010 at 12:11 pm
Why don’t you ask the US to open up the rating agencies up to free competition before they start lecturing us on financial reform. Three protected rating agencies just take in one anothers’ laundry.
June 3rd, 2010 at 12:21 pm
“…its manifest failing to detect the toxic nature of financial products containing sub-prime mortgages which unleashed the financial crash.”
That was only the proximal cause of the crash. The ultimate causes were general opacity of high end financial products being traded between banks (banks were unwilling to lend to one another not knowing what the other banks had on their books) and the curious combination of too little and too much regulation: Too much; banks in the States were incentivized by the government to lend to sub-prime borrowers, the rating agencies are protected from competition and don’t do their jobs properly, too much faith was put in organisations like the SEC and over here the FSA which manifestly weren’t equipped (institutionally or legally) to do their jobs properly and it was understood that the Fed would bail out any institution which was likely to collapse leading to a lack of incentives for internal scrutiny of financial practices. Too little; the SEC and FSA and the like are underpowered, there isn’t enough forced transparency such that if there were freelance rating agencies it probably wouldn’t make much difference, central banks currently must bail out large institutions because they are linked directly to homeowners and are so large (necessitating Vince style break-up-the-banks or Obama style caps on the size of banks), the housing market should have been both protected from the stock market and not allowed to become such an asset bubble in its own right.
June 4th, 2010 at 10:03 am
Sorry to comment off topic, but are you going to do a post about why you chose to nominate Ed Miliband after even he had suggested that people should nominate those candidates who weren’t already on the ballot paper, in order to try and get a broad contest?
I didn’t think you would nominate John McDonnell – though I think you should have done – but I really thought you would nominate Diane Abbott.
You might very well choose to vote for Ed Miliband – he seems a nice enough chap – but what on earth was the point of nominating him?
June 5th, 2010 at 10:10 am
(Can I just point out that only one of those Duncans was me!)